A lot of investors see the potential return of getting into real estate, but they lack the knowledge or the time to select and manage an investment property with the level of detailed care and attention that it needs.
If that sounds like you, then maybe you’ve considered the idea of investing in a Real Estate Investment Trust (REIT). A REIT gives you the ability to invest in real estate, without having to be a real estate market expert or property manager. By putting your money in, diversifying it across multiple properties, areas, and property types, they could also be a less risky way to dip your toe in the market.
Passive income, no management required, and capital growth? Sign us up, right?
But hold steady for a moment. While REITs offer a lot of potential value, it’s important to fully understand what you’re getting into before you decide if it’s the right path for you. In this blog, we’ll look at what an REIT is, how it works, and how you can get started.
What is a Real Estate Investment Trust?
A Real Estate Investment Trust (REIT) is an investment vehicle like a mutual fund, but specifically focused on real estate. In essence, it allows you to invest in real estate without directly purchasing or managing a physical property.
First started in the US, REITs were introduced in Australia in the 1970s as Listed Property Trusts (LPTs) on the Australian Stock Exchange (ASX). While initially focused on retail and office space, over time the trusts diversified into a wide array of sectors.
Today, you can invest in Equity, Mortgage, or Hybrid REITs:
- Equity REITs will invest in income-producing properties to earn money from rent.
- Mortgage REITs don’t invest in properties directly but rather lend money to property buyers, making profit via the interest on the money they loan out.
- A Hybrid REIT (you guessed it) does a bit of both.
To register as an REIT, a company needs to follow strict rules including:
- They must invest at least 80% of their assets in real estate or entities that hold real estate property.
- They must distribute at least 90% of their net income to investors annually.
There are also tax advantages to REITs. Because REITs, in Australia and elsewhere, are designed to pass money onto investors, they are exempt from corporation tax on any income they pass onto shareholders (that’s you).
From your perspective as an investor, dividends from your REIT are normally taxed as ordinary income or as Capital Gains Tax (CGT). If you hold REITs in a superannuation fund, the tax on dividends might be lower than usual, but it’s always best to get professional tax advice to make sure you're following the rules and making the most of any tax benefits.
How Do REITs Work?
A REIT works by pooling your money with that of other investors and using it to invest in and manage income-producing real estate. That might include retail properties, data centres, or residential property for rent. The income that those properties generate is distributed to you and the other investors via dividends, while you can buy and sell your REITs on the ASX.
Remember, a REIT is required by law to distribute at least 90% of its income to investors, so in the right circumstances, they can be a reliable source of regular income. That can make them a very attractive investment if your goal is to generate a steady cashflow.
Unlike a traditional real estate investment, you don’t need to worry about the maintenance and management of the property. That’s all managed by the fund. They can also present less risk, because your investment is essentially spread across several different properties, so you’re less vulnerable to one property suddenly losing its value.
Listed vs. Non-Listed REITs: Understanding the Differences
If you do decide to go ahead, it’s important to understand the difference between listed and non-listed REITs. Most REITs in Australia are listed, but depending on your circumstances you may feel a non-listed REIT is a better fit.
A listed REIT is traded publicly on the ASX. That gives you greater liquidity because, as an investor, you can buy or sell reasonably quickly and easily. Because it’s a public stock exchange, you also have more transparency on pricing, so you can always see exactly what your investment is worth at any given moment.
Being listed on the ASX also means that listed REITs are subject to more regulation, primarily from the Australian Securities and Investments Commission (ASIC) and Australian Accounting Standards (AASB). Listed REITs are required, for example, to provide regular financial reports and other disclosures, in addition to the requirement that a certain percentage of profits are paid out to investors.
In contrast, non-listed REITs aren’t listed on the stock exchange. As a result, they’re subject to fewer regulations, including the requirement to pay out on a regular basis. You also have less liquidity and may be required to hold your investment for a set period.
Without the public view on pricing, non-listed REITs can be more difficult to value, but less vulnerable to market sentiment and, therefore, more stable. They also tend to focus on longer-term investments, with income generated through rent, giving them less short-term price volatility.
Where to Buy REITs
You can buy publicly traded REITs on stock exchanges like the ASX, and via online brokerages and platforms. You can also buy REITs, either listed or non-listed, via financial advisors and other wealth management services. To learn more about publicly traded REITs and how to get started with a modest investment, check out our guide on "How to Invest $10,000 in Australian Real Estate" where we break down A-REITs as one of the most accessible entry points into the property market.
As well as buying REITs directly, you can invest in them through mutual funds and Property Exchange-Traded Funds (ETFs). ETFs typically hold multiple REITs alongside other real estate assets. That diversification can also give them more stability as an investment than a single REIT, making them a worthwhile option for investors seeking broad exposure with less volatility.
How to Start Investing in REITs: Key Considerations
Investing in REITs starts by assessing your own investment goals. Are you looking for steady cashflow or capital growth? Long-term stability or quick returns? Are you starting out and looking for a low-risk platform to build on, or ready to take bigger risks in the hope of big profits?
When you’ve established these questions, you need to determine your budget. Different funds have different minimum spends and cater to different levels of investment, so it’s important to know where you stand.
Next, do your research into different REIT sectors to decide the best one for you. The level of risk varies by sector and you may want to find an REIT that gives you a mix, or you may have a specific sector in mind. Typically, REITs invest in one or a combination of:
- Residential
- Commercial
- Healthcare
- Retail
- Data centers
- Self-storage
Then, evaluate the performance of your shortlisted REITs by investigating their:
- Funds from Operations (FFO): Measures an REIT’s profitability, calculated by adjusting net income for property-related depreciation and gains/losses on asset sales.
- Adjusted Funds from Operations (AFFO): Measures an REIT’s cash flow by subtracting capital expenditures and other recurring costs needed for maintenance.
- Dividend Yield: The annual income investors get in dividends, expressed as a percentage of the REIT’s current share price, helping assess your potential income return.
- Payout Ratio: The proportion of a REIT’s earnings (typically FFO or AFFO) that is distributed to investors as dividends, indicating sustainability of income payments.
- Debt Ratio – A measure of a REIT’s financial leverage, showing the proportion of total assets funded by debt, with higher ratios indicating greater reliance on borrowing.
Finally, you may want to consider building a diversified REIT portfolio. Although there are advantages to having a focus, the more you diversify the less vulnerable you are to volatility in one sector.
Starting Your Own REIT: Key Considerations
If you’re planning on setting up a REIT yourself, you need to establish a Managed Investment Scheme (MIS) under the Corporations Act 2001, register with ASIC and ensure you comply with all the ATO’s rules to qualify for tax transparency.
Any REIT will need significant upfront capital, so you need private investors, institutional backers, or an IPO lined up. Your REIT will also need a Responsible Entity (RE) established to provide overall management.
We’ve already covered the various regulations that REITs are required to follow, so you need to make sure that your REIT is following ASX listing rules, ASIC regulations, and financial reporting standards.
Given this complexity, if you do want to start your own REIT, it’s vital to seek professional advice from legal experts, accountants, property valuation experts, fund managers, and financial consultants.
Investing with Real Estate Investment Trusts can be a great way to get into real estate investment without taking on the challenge of property management. While it gives you less control than investing directly, by spreading your risk it can also offer you greater stability.
FAQs
What is a Real Estate Investment Trust (REIT)?
A Real Estate Investment Trust (REIT) is an investment vehicle similar to a mutual fund but specifically focused on real estate. REITs allow you to invest in real estate without directly purchasing or managing physical properties. In Australia, REITs were introduced in the 1970s as Listed Property Trusts (LPTs) on the ASX. They must invest at least 80% of their assets in real estate and distribute at least 90% of their net income to investors annually. There are three main types: Equity REITs that invest in income-producing properties, Mortgage REITs that lend money to property buyers, and Hybrid REITs that combine both approaches.
How does a REIT work?
A REIT works by pooling money from multiple investors to purchase, manage, and operate income-producing real estate properties. These properties generate revenue through rent, property appreciation, and strategic development. By law, REITs must distribute at least 90% of their taxable income to shareholders, making them potential sources of regular income. Your investment is spread across several properties, reducing the risk compared to owning a single property. The REIT's professional management team handles all property maintenance, tenant relations, and investment decisions, allowing you to invest in real estate without property management responsibilities.
How to invest in REITs?
To invest in REITs, first assess your investment goals (income vs. growth) and determine your budget. Research different REIT sectors (residential, commercial, healthcare, retail, data centers, self-storage) to find those that align with your investment strategy. Evaluate potential REITs by examining key metrics like Funds from Operations (FFO), Adjusted Funds from Operations (AFFO), dividend yield, payout ratio, and debt ratio. You can purchase publicly traded REITs through the ASX, online brokerages, or financial advisors. Consider starting with a diversified REIT ETF if you're new to REIT investing. For greater diversification, build a portfolio across multiple REITs representing different property sectors and geographic regions.
Where to buy Real Estate Investment Trusts?
You can buy publicly traded REITs on the Australian Securities Exchange (ASX) through online brokerages and trading platforms like CommSec, NAB Trade, or SelfWealth. Financial advisors and wealth management services can also help you purchase both listed and non-listed REITs. Another option is to invest in REITs through mutual funds and Property Exchange-Traded Funds (ETFs), which typically hold multiple REITs alongside other real estate assets, providing more diversification and stability than investing in a single REIT. Some popular platforms offer regular investment plans that allow you to invest small amounts periodically, helping you build your REIT portfolio over time.
How to start a REIT in Australia?
Starting your own REIT in Australia requires establishing a Managed Investment Scheme (MIS) under the Corporations Act 2001 and registering with ASIC. You'll need significant upfront capital from private investors, institutional backers, or an IPO. A Responsible Entity (RE) must be established to manage the REIT. Your REIT must comply with ASX listing rules, ASIC regulations, financial reporting standards, and ATO requirements to qualify for tax transparency. Given this complexity, you'll need professional guidance from legal experts, accountants, property valuation experts, fund managers, and financial consultants. Consider partnering with established property professionals who understand the market and can help identify profitable investment opportunities.
